Accounting Roundup: Discount Rates On The Rise

Details are emerging about key assumptions that defined benefit (DB) scheme sponsors around Europe will be using in their end-of-year accounts.

UK discount rates are running around 25 basis points higher than last year, according to Aon consultant Simon Robinson, with the average rate across FTSE 100 companies coming in at 2.9 percent.

This compares with a rise of 40-50bps at the end of October among Willis Tower Watson’s FTSE 100 clients, with rates in the region of 2.6-3%.

German sponsors are also set to see an easing of pension-related stress in their accounts.

Mercer’s chief actuary in Germany, Thomas Hagemann, told IPE that discount rates were 15-20bps higher than at the same time last year on the Mercer yield curve.

In terms of hard numbers, this added up to 2.05% at 15 years’ duration, and 2.26% at 20 years out, as at 31 October.

In the US, Beth Ashmore, a senior director with Willis Towers Watson, said that, in contrast to drops over the past few years, discount rates would “probably be around 85-90bps up between year-end 2017 and year-end 2018.”

DB, DC plan definitions under IAS 19

The European Securities and Markets Authority (ESMA) has contacted the IFRS’ interpretations committee asking it to consider the distinction between DB and defined contribution (DC) pension promises.

ESMA has asked the committee to examine whether a future right to a discount in plan contributions is sufficient to tip a scheme from DC to DB.

Under IAS 19, any plan liability that is not extinguished by a payment of contributions is a DB plan.

The difference between the two for accounting outcomes is that a sponsor simply expenses DC contributions, whereas for DB plans the sponsor must apply the “projected unit credit” method. This involves projecting the plan liability forward in line with the plan assumptions and discounting back using a high-quality corporate bond rate before netting off any plan assets.

In its submission, ESMA noted that there were two views on the interpretation of IAS 19’s DC criteria, one of which required preparers to take upside into account and one that did not.

Aon’s Robinson said: “The query is the distinction between DB and DC plans. Many users of IAS 19 think the distinction between DC and DB is clear, but the ESMA letter shows that this isn’t true.

“Most plans are clearly either DB or DC, but some could meet either or both definitions depending on how you read the relevant paragraphs of IAS 19.”

IASB staff still working on DC discount rate anomaly

On 13 December, IASB staff presented their plan for dealing with pension promises based on an asset return, such as DC or collective DC schemes.

The purpose of the research is to address an inconsistency that arises out of the use of a corporate bond rate to discount benefits that are based on a higher-than-risk-free asset rate of return.

Staff are exploring a solution to this problem that is based on using an asset rate of return that does not exceed the discount rate.

The staff team told the board that it planned to conduct outreach on this potential solution and present their findings during the second half of next year.

Staff noted, however, that if the outreach confirmed that their approach was unworkable, they would propose that the board halt its work on pensions.